Making Decisions About Gold and Silver# Stock
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By Using False and Incomplete Information, You Will Make Bad Decisions About
Gold and Silver
May 5, 2011 By Patrick A. Heller
Back in January 1980, when the Hunt brothers pushed up the price of silver
to $50, many politically well-connected Wall Street firms were facing
massive losses. Suddenly, the COMEX changed the rules for trading
specifically to punish the Hunts and help these Wall Street firms recoup
some of their losses.
Among the most outrageous rule changes was a prohibition against new
purchases of long silver contracts on the COMEX. Parties who already owned
long silver contracts were restricted to only one option—to sell it to a
party holding a short position. Prices quickly collapsed.
When the December 2010 and March 2011 COMEX silver contracts matured, the
available COMEX registered inventories were hopelessly inadequate to meet
delivery commitments. So, as COMEX rules permit, unusually large numbers of
these contracts were settled for cash. There were multiple reports of
March contracts being settled for cash at prices more than 30% above the
spot price.
As I wrote in CoinUpdate.com last week, there is also a developing shortage
of available physical silver outside of the COMEX. The condition has only
worsened in the days since.
On Friday last week, another squeeze was developing with the maturing May
silver contracts. Gold looked poised to jump to $1,600 and silver to
surpass $50. Neither made it. In fact, silver has dropped nearly 30% from
its peak in April and gold is down about 6%.
It looked to me that the Wall Street firms that have huge short positions in
gold and silver were on the brink of default on these contracts, if not
outright bankruptcy. So, it is not a total surprise to me that there have
been numerous rule changes in the past two weeks by the COMEX and some
trading houses to force down the silver price (in particular) and gold.
Many people make investments borrowing money to leverage their results. As
prices rise, it is sensible for the exchanges to raise margin requirements.
However, the COMEX has now raised margin requirements for silver contracts
five times over a two week period! Before these hikes, the minimum margin
per contract was $8,700. On May 9, when the fifth increase takes effect, it
will take more than $21,000 minimum per contract! Note that the last four
margin requirement hikes occurred after the price of silver was falling—
which does not make sense unless the real purpose is to suppress prices!
Some Wall Street firms have raised the margin requirements for their own
customers to as high as $30,000 (see my May 3 column at Numismaster.com for
details).
The net effect of these rule changes is that it has left many leveraged
investors unable to meet these margin calls. As a result, a significant
number of long contracts have been liquidated this week without regard to
the price.
In addition, the mainstream media has given more coverage to the silver
market this week than it seems like they have given it over the past few
years. Virtually all of this coverage is along the lines that there are
major sellers out there, everyone is taking profits, the “bubble prices”
of gold and silver have peaked, and the like.
Each of these themes is filled with incomplete or inaccurate information.
If you refer only to these stories, you will run a high risk of making an
incorrect decision about whether to buy, hold, or sell gold and silver.
For instance, one of the stories is that Carlos Slim, the current richest
man in the world, has presold more future gold and silver production from
the mines that he owns. I have not seen one story reminding people that
Slim’s companies last October reported that they had pre-sold 27% of
anticipated gold production through the end of 2013 at an average price of $
1,189 per ounce and 43% of expected silver production through the end of
2013 at an average price of $18.71 per ounce. Although Slim is apparently
savvy enough to own such mining interests, he is obviously getting bad
advice or making poor decisions on how to maximize his profits in these
markets.
Much has been made of George Soros reporting that he has sold a significant
chunk of his gold holdings, while little has been reported that John Paulson
’s much larger holdings are being held until gold reaches $4,000 per ounce.
Among my own customers, there are those who have sold seven figures worth
of paper silver contracts above $49 per ounce on the anticipation that they
would be able to replace them with physical silver at lower prices. These
customers of ours expect gold and silver prices to be much higher than they
reached in April. They were not getting out of the market, they were just
trying to maximize profits.
As for the claims that the “bubble” has burst, the quantity of open COMEX
contracts in the gold and silver markets proves that to be false. When a
bubble market starts to tumble, the quantity of open contracts drops sharply
. The number of COMEX gold and silver contracts has only dipped slightly.
As prices started to fall, some unleveraged owners also opted to take some
profits and reduce their holdings or get out of the gold and silver markets.
Because of the heightened volatility, other potential buyers have chosen
to do nothing for the time being. Although these actions helped push prices
down further, the main force behind falling prices was the COMEX and Wall
Street firms’ increases in margin requirements.
As you might imagine, I have been deluged with visitors, callers, and emails
this week asking me what is happening and what will happen in the future.
I do not know where the current bottom will be for silver, but I do expect
it to reach bottom soon. One theory is that the silver market has touched
bottoms in recent years when the amount of leverage in commodity contracts
is only 7 or 8 to 1. If this holds, that would point to $34 as being the
bottom for silver. Another theory is that the bottom will be reached when
silver gets down to its 200-day moving average. Right now, that points to a
bottom of about $28.00.
I don’t think it is a matter of if, but when silver will recover. When it
does, it will recover quickly, though maybe not as fast as it has declined
this week. It is obvious that the US government, its trading partners, and
allies have decided to try to cap the price at $50. I have little doubt
that this will eventually be surmounted—almost certainly this year.
Above all, remember that the fundamental reasons for owning gold and silver
for protection against calamities affecting the value of paper assets such
as currencies, stocks and bonds have not changed at all as a result of this
week’s decline in prices.
Here are just some of the reasons why you should hold and consider adding to
your precious metals position:
* The US government is still running such huge budget deficits that it
now has to borrow 43 cents of every dollar it is spending!
* During all of this turmoil, the value of the US dollar has continued
to decline almost every day except today!
* US Treasury debt is so unpopular among foreign and domestic investors
at current low interest rates that the Federal Reserve is now purchasing 85%
of all long-term issues!
* State and local governments (including public school districts) have
not really done anything to cope with the more than $1 trillion in unfunded
retirement liabilities.
* I have not seen the prices of any food products or gasoline drop by 30
% this week! In fact, worldwide food costs are rising at a faster pace this
year than ever before!
* The US government is faced with an impossible resolution of its
inflation of the money supply (also called Quantitative Easing 2) program
that ends June 30. The government has to make a decision which of two
methods it will choose to further destroy the value of the US dollar—either
by stopping quantitative easing or by continuing with a new program.
* The jobs market continues to be horrible. As I understand it, the US
needs to create 115,000 new jobs every month so that the rising population’
s unemployment rate will be unchanged. Even if the Bureau of Labor
Statistics reports a higher number of jobs, you have to back out this figure
and also the number of double-counted new jobs attributable to the birth/
death adjustment.
* Residential housing prices have now declined lower than the so-called
market bottom in March 2009. In the latest report, 34.5% of homes sold were
bank-owned properties, a much higher proportion than in the past. Don’t
be surprised of home prices continue to fall.
I could go on, but I think you get the picture.
If you make your decisions about what to do about gold and silver on the
basis of accurate fundamental information rather than misleading and
incomplete mainstream media reports, you will obtain better future results.
There have been numerous short term price drops over the past decade, none
of which lasted.
What we are seeing this week, in my judgment, is actually more like a
desperate last ditch effort to delay the inevitable explosion in gold and
silver prices. The extremity of these recent actions leads me to expect
soaring prices sooner rather than later.
P.S. One last tip—if you purchase physical metals and don’t leverage your
purchases, you won’t find yourself forced out of the market against your
will.
Gold and Silver
May 5, 2011 By Patrick A. Heller
Back in January 1980, when the Hunt brothers pushed up the price of silver
to $50, many politically well-connected Wall Street firms were facing
massive losses. Suddenly, the COMEX changed the rules for trading
specifically to punish the Hunts and help these Wall Street firms recoup
some of their losses.
Among the most outrageous rule changes was a prohibition against new
purchases of long silver contracts on the COMEX. Parties who already owned
long silver contracts were restricted to only one option—to sell it to a
party holding a short position. Prices quickly collapsed.
When the December 2010 and March 2011 COMEX silver contracts matured, the
available COMEX registered inventories were hopelessly inadequate to meet
delivery commitments. So, as COMEX rules permit, unusually large numbers of
these contracts were settled for cash. There were multiple reports of
March contracts being settled for cash at prices more than 30% above the
spot price.
As I wrote in CoinUpdate.com last week, there is also a developing shortage
of available physical silver outside of the COMEX. The condition has only
worsened in the days since.
On Friday last week, another squeeze was developing with the maturing May
silver contracts. Gold looked poised to jump to $1,600 and silver to
surpass $50. Neither made it. In fact, silver has dropped nearly 30% from
its peak in April and gold is down about 6%.
It looked to me that the Wall Street firms that have huge short positions in
gold and silver were on the brink of default on these contracts, if not
outright bankruptcy. So, it is not a total surprise to me that there have
been numerous rule changes in the past two weeks by the COMEX and some
trading houses to force down the silver price (in particular) and gold.
Many people make investments borrowing money to leverage their results. As
prices rise, it is sensible for the exchanges to raise margin requirements.
However, the COMEX has now raised margin requirements for silver contracts
five times over a two week period! Before these hikes, the minimum margin
per contract was $8,700. On May 9, when the fifth increase takes effect, it
will take more than $21,000 minimum per contract! Note that the last four
margin requirement hikes occurred after the price of silver was falling—
which does not make sense unless the real purpose is to suppress prices!
Some Wall Street firms have raised the margin requirements for their own
customers to as high as $30,000 (see my May 3 column at Numismaster.com for
details).
The net effect of these rule changes is that it has left many leveraged
investors unable to meet these margin calls. As a result, a significant
number of long contracts have been liquidated this week without regard to
the price.
In addition, the mainstream media has given more coverage to the silver
market this week than it seems like they have given it over the past few
years. Virtually all of this coverage is along the lines that there are
major sellers out there, everyone is taking profits, the “bubble prices”
of gold and silver have peaked, and the like.
Each of these themes is filled with incomplete or inaccurate information.
If you refer only to these stories, you will run a high risk of making an
incorrect decision about whether to buy, hold, or sell gold and silver.
For instance, one of the stories is that Carlos Slim, the current richest
man in the world, has presold more future gold and silver production from
the mines that he owns. I have not seen one story reminding people that
Slim’s companies last October reported that they had pre-sold 27% of
anticipated gold production through the end of 2013 at an average price of $
1,189 per ounce and 43% of expected silver production through the end of
2013 at an average price of $18.71 per ounce. Although Slim is apparently
savvy enough to own such mining interests, he is obviously getting bad
advice or making poor decisions on how to maximize his profits in these
markets.
Much has been made of George Soros reporting that he has sold a significant
chunk of his gold holdings, while little has been reported that John Paulson
’s much larger holdings are being held until gold reaches $4,000 per ounce.
Among my own customers, there are those who have sold seven figures worth
of paper silver contracts above $49 per ounce on the anticipation that they
would be able to replace them with physical silver at lower prices. These
customers of ours expect gold and silver prices to be much higher than they
reached in April. They were not getting out of the market, they were just
trying to maximize profits.
As for the claims that the “bubble” has burst, the quantity of open COMEX
contracts in the gold and silver markets proves that to be false. When a
bubble market starts to tumble, the quantity of open contracts drops sharply
. The number of COMEX gold and silver contracts has only dipped slightly.
As prices started to fall, some unleveraged owners also opted to take some
profits and reduce their holdings or get out of the gold and silver markets.
Because of the heightened volatility, other potential buyers have chosen
to do nothing for the time being. Although these actions helped push prices
down further, the main force behind falling prices was the COMEX and Wall
Street firms’ increases in margin requirements.
As you might imagine, I have been deluged with visitors, callers, and emails
this week asking me what is happening and what will happen in the future.
I do not know where the current bottom will be for silver, but I do expect
it to reach bottom soon. One theory is that the silver market has touched
bottoms in recent years when the amount of leverage in commodity contracts
is only 7 or 8 to 1. If this holds, that would point to $34 as being the
bottom for silver. Another theory is that the bottom will be reached when
silver gets down to its 200-day moving average. Right now, that points to a
bottom of about $28.00.
I don’t think it is a matter of if, but when silver will recover. When it
does, it will recover quickly, though maybe not as fast as it has declined
this week. It is obvious that the US government, its trading partners, and
allies have decided to try to cap the price at $50. I have little doubt
that this will eventually be surmounted—almost certainly this year.
Above all, remember that the fundamental reasons for owning gold and silver
for protection against calamities affecting the value of paper assets such
as currencies, stocks and bonds have not changed at all as a result of this
week’s decline in prices.
Here are just some of the reasons why you should hold and consider adding to
your precious metals position:
* The US government is still running such huge budget deficits that it
now has to borrow 43 cents of every dollar it is spending!
* During all of this turmoil, the value of the US dollar has continued
to decline almost every day except today!
* US Treasury debt is so unpopular among foreign and domestic investors
at current low interest rates that the Federal Reserve is now purchasing 85%
of all long-term issues!
* State and local governments (including public school districts) have
not really done anything to cope with the more than $1 trillion in unfunded
retirement liabilities.
* I have not seen the prices of any food products or gasoline drop by 30
% this week! In fact, worldwide food costs are rising at a faster pace this
year than ever before!
* The US government is faced with an impossible resolution of its
inflation of the money supply (also called Quantitative Easing 2) program
that ends June 30. The government has to make a decision which of two
methods it will choose to further destroy the value of the US dollar—either
by stopping quantitative easing or by continuing with a new program.
* The jobs market continues to be horrible. As I understand it, the US
needs to create 115,000 new jobs every month so that the rising population’
s unemployment rate will be unchanged. Even if the Bureau of Labor
Statistics reports a higher number of jobs, you have to back out this figure
and also the number of double-counted new jobs attributable to the birth/
death adjustment.
* Residential housing prices have now declined lower than the so-called
market bottom in March 2009. In the latest report, 34.5% of homes sold were
bank-owned properties, a much higher proportion than in the past. Don’t
be surprised of home prices continue to fall.
I could go on, but I think you get the picture.
If you make your decisions about what to do about gold and silver on the
basis of accurate fundamental information rather than misleading and
incomplete mainstream media reports, you will obtain better future results.
There have been numerous short term price drops over the past decade, none
of which lasted.
What we are seeing this week, in my judgment, is actually more like a
desperate last ditch effort to delay the inevitable explosion in gold and
silver prices. The extremity of these recent actions leads me to expect
soaring prices sooner rather than later.
P.S. One last tip—if you purchase physical metals and don’t leverage your
purchases, you won’t find yourself forced out of the market against your
will.
